How to Figure Interest on a Money Market Account
Money market deposit accounts (MMDAs) are well-known for their higher interest rates. However, not all MMDA interest rates are created equal. Many people are unaware of this fact because they don't know how to calculate the interest rate of an account, which tells them how much money they truly earn. Learning how to figure your interest rate on your MMDA enables you to find the highest-earning MMDA.
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Instructions
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Bear in mind that the higher the interest rate for an MMDA, the more money you'll earn. You also have to take into account the compound interest you earn on your MMDA per year. Compounding basically means the bank adds more interest to your interest during certain periods of the year.
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Gauge the value of your account by determining the APY (Annual Percentage Yield). The APY calculates both your interest rate and your compound interest, giving you the true value of an MMDA.
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Plug the interest rate and compounding periods into the following formula: APY=(1+r/n) n-1. In this formula, r stands for the interest rate (converted to a decimal), and n stands for the number of compounding periods each year.
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The result of this formula is the APY percentage. This percentage tells you how much interest you really earn on your account per year. If your APY is 5%, and your account has $5,000, you earn $250 per year in interest--a notably high amount.
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Now that you know how to determine an APY, you can search for the highest-earning MMDA. If your local bank isn't offering a competitive APY, you can open an online MMDA with any major U.S. bank, such as Capital One and Bank of America.
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Tips & Warnings
Some banks compound interest on their accounts at a daily rate rather than a monthly or quarterly rate. Ask your financial institution how many times it compounds interest on it's MMDAs. If the compounding rate is low, you may want to look for another bank that compounds more frequently so you can get the most leverage out of your MMDA.
